It's Time for a Comprehensive Review of Canada's Tax System

Gabe Hayos, FCPA, FCA
The author is vice-president of Tax at CPA Canada and one of the country's leading tax advisors.

William Andrew via Getty Images

Chartered Professional Accountants of Canada (CPA Canada) "Likes" Budget 2015 for the support it delivers to help Canadian small businesses compete and help Canadians of all ages to manage their savings before and during retirement. But the government could have aimed higher in its efforts to simplify the tax system. By failing to initiate a process of comprehensive tax reform, the government has missed an opportunity to lift Canada's prospects for long-term prosperity and growth.

A handful of proposals would reduce red tape and simplify tax compliance. Still, we are disappointed the government didn't look at the broader picture and address significant tax reform.

Tax reform and simplification would improve Canada's international competitiveness, productivity and economic growth, from both a personal and corporate perspective. It's time for a comprehensive review of the country's tax system to reduce its complexities and inefficiencies.

The budget does take steps to shore up Canada's tax base, channeling much-needed funding to the Canada Revenue Agency (CRA) to strengthen tax compliance. These funds will support new enforcement approaches, such as advanced analytics, improved risk assessment systems and business intelligence. Tax cheats hurt the economy and CPA Canada welcomes the budget's measures to combat the underground economy in Canada, as well as international tax evasion and aggressive tax avoidance. The government has indicated it will balance its efforts to reduce such evasion and avoidance, while ensuring it doesn't adversely affect Canada's international competitiveness.

It's also good news that the government heeded our call to simplify the foreign property reporting system, although we believe more could be done to ease the burden of these complex rules for honest taxpayers.

Here are some other key proposals announced in Budget 2015, and our views on how they affect Canadians and Canadian businesses.

Support for Businesses

Budget 2015 proposes support for small businesses by reducing the small business tax rate in stages from 11 per cent to a target rate of nine per cent, as of 2019. This special low tax rate applies on the first $500,000 per year of business income of a private Canadian company. The government says this will put an estimated $2.7 billion back into the pockets of small businesses and their owners. Clearly, support for Canada's business community helps in today's unsettled economy.

Further support for manufacturers is proposed through a 10-year investment incentive that will allow a faster write-off for machinery and equipment. While the incentive is welcome, we encourage the government to make a greater commitment to ongoing capital cost allowance (CCA) reform. Updating CCA rates would encourage manufacturers to invest in the most modern, productivity-enhancing equipment, and thus enhance their competitiveness in the global economy. Reducing the expanding number of CCA classes would go a long way to simplifying the tax system.

Saving for the Future

The increase in contribution limits for Tax Free Savings Accounts (TFSAs) is supported by CPA Canada. We firmly believe that incentives, such as TFSAs, are required to help Canadians save money for their retirement. Encouraging people to save now and having them look to the future is essential if Canadians are to be well positioned financially in their golden years. It will be important, however, to monitor the TFSA program over the long-term, especially in terms of lost tax revenue.

We are also pleased to see the easing of the rules associated with registered retirement income funds (RRIFs) to make it easier for seniors to manage their savings during retirement.

Budget 2015 proposes reducing the RRIF minimum withdrawal percentages that apply for people aged 71 to 94, starting in 2015.

Home Accessibility Tax Credit

A new 15 per cent credit for home improvements will increase accessibility for seniors and persons with disabilities, on a maximum expenditure of $10,000, starting in 2016. Receipts will be needed to support the credit claim. CPA Canada supports the added benefit of this credit in discouraging underground economic activity, as well as the goal of reducing the personal tax burden.

However, such specific tax measures add unneeded complexity to the tax system. It would be simpler to give broader-based tax relief (for example, through lower personal tax rates) as Canada's fiscal situation permits.

Supporting Charities

To support Canadian charities, Budget 2015 proposes a capital gains exemption for the arm's length sales of private company shares and real estate when the proceeds are donated to charity within 30 days of the sale. Keep in mind, however, that this proposal applies for donations made in 2017 and later years.

The budget also proposes to extend eligibility for the charitable donation tax credit or deduction to foreign charitable foundations if they receive federal government aid and their work relates to disaster relief or urgent humanitarian aid or is in Canada's national interest. This proposal will come into effect when the budget legislation is enacted.

Boosting Financial Capability

Finally, we applaud the federal government for confirming that it will release a national strategy in 2015-16 to strengthen the financial literacy for Canadians of all ages. This strategy is expected set out goals and priorities to increase the financial literacy of Canadians throughout their lives.

Financial capabilities vary widely among Canadians. We must ensure that people have the skills, knowledge, information and resources they need to make wise decisions about their long-term financial security. That's why CPA Canada works to improve financial literacy across the country through its 11,000-member strong volunteer program, numerous tools and resources and its voice on Canada's National Steering Committee on Financial Literacy.

You can find CPA Canada's more detailed analysis of the federal budget here.